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Significant Customers
 3 Months Ended
Mar. 31, 2020
Significant Customers [Abstract]  
Significant Customers SIGNIFICANT CUSTOMERS
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 11% and 15% of the Company's consolidated revenues from continuing operations for the three month periods ending March 31, 2020 and 2019, respectively. The Company’s balance sheets include accounts receivable with DHL of $5.4 million and $12.7 million as of March 31, 2020 and December 31, 2019, respectively.
The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate crew, maintenance and insurance (“CMI”) agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides additional air cargo transportation services for DHL through ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such as power units, air starts and related maintenance services to DHL under separate agreements.
Amazon
The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and had an original term of five years.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon the execution of the Investment Agreement and all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche of warrants, which were issued and vested on March 8, 2018, grants Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants will be issued and vest on September 8, 2020, and will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise price of the warrants is $9.73 per share, which represents the closing
price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants are exercisable in accordance with its terms through March 8, 2021.
On December 22, 2018 the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company delivered six of the 767-300 aircraft in 2019 and plans to deliver the remainder in 2020. All ten of these aircraft leases will be for ten years.
In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon was issued warrants for 14.8 million common shares which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the 2016 agreements.  Warrants for 11.1 million common shares vested as existing leases were extended and six additional aircraft leases were executed and added to the ATSA operations. More of these warrants will vest as four additional aircraft leases were executed. These new warrants will expire if not exercised within seven years from their issuance date. They have an exercise price of $21.53 per share.
Additionally, Amazon will be able to earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of the Company, by leasing up to seventeen more cargo aircraft from the Company before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.
The warrants issuable under these new agreements with Amazon required an increase in the number of authorized common shares of the Company. Management submitted proposals for shareholder consideration at the Company's annual meeting of shareholders on May 9, 2019 calling for an increase in the number of authorized common shares and approval of the warrants as required under the rules of the Nasdaq Global Select Market. Both proposals were approved by shareholders on May 9, 2019.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for financial instruments. Warrant obligations are marked to fair value at the end of each reporting period. The value of warrants is recorded as a customer incentive asset if it is probable of vesting at the time of grant and further changes in the fair value of warrant obligations are recorded to earnings. Upon a warrant vesting event, the customer incentive asset is amortized as a reduction of revenue over the duration of the related revenue contract.
As of March 31, 2020, the Company's liabilities reflected 14.8 million warrants from the 2016 Investment Agreement having a fair value of $129.7 million and 24.7 million warrants from the 2018 Amazon agreements having a fair value of $135.4 million. During the three month periods ended March 31, 2020 and 2019, the re-measurements of all the warrants to fair value resulted in net non-operating gains of $118.0 million and $8.3 million before the effect of income taxes, respectively.
Revenues from Amazon comprised approximately 29% and 18% of the Company's consolidated revenues from continuing operations for the three month periods ending March 31, 2020 and 2019, respectively. The Company’s balance sheets include accounts receivable with Amazon of $46.8 million and $50.1 million as of March 31, 2020 and December 31, 2019, respectively.
The Company's earnings in future periods will be impacted by the re-measurements of warrant fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described above for financial reporting.
DoD
The Company is a provider of cargo and passenger airlift services to the DoD. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the DoD were approximately 30% and 37% of the Company's total revenues from continuing operations for the years ended March 31, 2020 and 2019, respectively. The Company's balance sheets included accounts receivable with the DoD of $59.4 million and $44.5 million as of March 31, 2020 and December 31, 2019, respectively.